At first glance BMI is one of life's runners-up. It's the UK's second biggest full service carrier (after BA), Britain's second largest low-cost airline (after EasyJet and discounting Ryanair as Irish), and the number two slot holder at Heathrow (again after BA). It's the middle man: without the panache of gang leaders like BA and Virgin, but too sensible to hang out with the more mouthy low-cost rebels.

However, this belies the airline's proud record of challenging the status quo, underrates the experience of more than 65 years survival, and potentially ignores the advantage of the middle ground.

In much the same way, BMI's chairman and major shareholder, Sir Michael Bishop, is a little unconventional but not too much; shyly charming or politely awkward, depending on how you look at it. When he speaks, it is with a courteous but quiet bluntness, and with a lifetime's love affair with an industry which has seduced - and ruined - many men.

And so it was that Bishop explained last week why he believes that reports of the death of full-service and low-cost carriers is premature, but also why the current price wars could have to end, and how BMI still hopes to win its latest battles with Heathrow airport. He also wouldn't elaborate on any of the things he didn't want to talk about, most notably his succession.

Bishop's life has been characterised by rebellions: rejecting his parents' choice of school, turning down his father's engineering firm to join British Midland Airways, and engaging in two key battles against aviation's established order. Since taking over what became British Midland and BMI British Midland, his key victories were in forcing the liberalisation of the UK domestic market and then access to Europe.

But it hasn't stopped: last week two of his latest battles made headlines. Firstly, BMI and the other members of the Star Alliance attacked BAA, the main UK airport operator, for pushing high charges at Heathrow to subsidise better facilities for BA. But what leverage do the airlines have, given that they don't want to pull out of the world's biggest international airport? 'I don't think it's advisable for the authority to have customers who provide something like approaching 25-30 per cent of the business at Heathrow as dissatisfied as they are now,' said Bishop. But what can they actually do? He won't say. 'We're in a negotiating position at the moment.'

On Friday, European transport ministers met to discuss, among other things, 'open skies' between Europe and the US. Crucially, BMI wants to fly to the US from Heathrow, a hugely profitable route currently reserved for BA, Virgin, American Airlines and United Airlines.

Under pressure from many European airlines and governments, including the UK's, the commission rejected the latest deal, but insisted it would keep negotiating - a move which probably delays a decision beyond the change of commissioners and the US presidential election and possible change of government this autumn. Bishop, however, does not accept claims that a deal is now years off. 'We're obviously talking about 2005 as a realistic date... there are changes at the top of the machine, but the machinery keeps on grinding underneath.'

But there are much wider industry struggles. Recent results for most airlines tell a sorry story, and BMI is no exception. Last year the East Midlands-based company lost £9.8 million on turnover of £772m from 9.4 million passengers; this was considerably more passengers than three years previously, but not a lot more revenue, and the loss compares with £8.2m profit in 2000.

This year the company expects to top 10 million passengers, and 'very much hopes' to break even - though Bishop is waiting until autumn to make more confident predictions. 'Traditionally the second half is significantly stronger...'

One obvious reason for caution is the recent surge in the price of oil. Fuel accounts for about 10 per cent of BMI's costs - less than average - and it bought 82 per cent of this year's stock and 21 per cent of next year's before the latest spike. However, BMI Mainline services have joined the rush to add a fuel surcharge, and the minimum 50 per cent hedging policy could bite back if BMI has to buy ahead at current strong prices. 'But the whole point of a hedging policy is to smooth out the peaks and troughs of the price,' adds Bishop.

Other recent problems include Iraq, worries about terrorism and last year's Sars virus. But the big underlying issue is the low-cost revolution - and now, according to many, the counter-revolution as the no-frills bubble starts to deflate. BMI reacted to low-cost start-ups like Ryanair and EasyJet by setting up its own version, BMIbaby, in 2002. Having absorbed some established BMI routes, 'baby', as they call it, is now second only in the UK to EasyJet (and Ryanair if you count the Irish airline's British hubs).

How well BMIbaby is doing financially is difficult to tell as Bishop, who with the other two founders controls 50.1 per cent of the business, won't publish a breakdown of the figures. Lufthansa and SAS own the other 49.9 per cent.

Signs from the other low-cost carriers are not great: after a burst of routes, passengers and aircraft orders, Ryanair and EasyJet are both feeling the pinch of competition from 50-plus no-frills airlines in Europe taking advantage of their business model, and a cheap market in planes and staff as established carriers dump cost to try to compete.

Last month Ryanair chief Michael O'Leary warned of a 'bloodbath' in the sector, claiming only four main no-frills airlines would survive. To their annoyance, BMIbaby and FlyBE were two he fingered to fail. Bishop doesn't want to get into a public slanging match, but he clearly relishes the irony of these competitive price-cutters blaming their problems on competitors' cost cutting.

'As far as I can see, the only bloodbath that's taken place is for the shareholders of EasyJet and Ryanair,' says Bishop, who points out that America's Southwest Airlines, the oft-cited model for low-cost carriers, consistently grew shareholder value during its growth phase.

Beyond the natural rivalry, Bishop does predict problems for low-cost companies: already mainline Europe is proving harder to break into, and regulators could object to some further cost-cutting ideas, he says. Overall, though, he dismisses warnings of the demise of both conventional and no-frills airlines. 'What's true is the no-frills sector as a proportion of the total number of passengers will grow,' says Bishop.

But BMI is still launching new full-ser vice routes - to Canada this summer, to the Caribbean later this year, and possibly India and South Africa. 'There's a very specific and growing market for people to travel in traditional network carriers.' But the current price war will end as technological and other savings get harder to undercut and this new order settles down. 'I wouldn't expect them to be anything like the scale, pro rata, of what's happened in the last five-10 years,' says Bishop. 'There comes a moment [when] it flattens out, or even slightly turns.'

Where will the chairman be in all this? It is reported Bishop will leave his fortune - estimated by the Sunday Times ' Rich List at £185m - to a charitable foundation. But who will run the business?

Last year talks with Virgin about a merger fell through - one reported reason being Bishop's reluctance to let go of the reins. The last time he was asked, he insisted BMI was no longer talking to Virgin or any other airline. Meanwhile, at 62 Bishop still does not want to talk about any succession.

He has 'no plans' to move on, but 'we have a number of senior managers who have been with us for a long time and have a lot of experience, and I'm sure they'll come into succession at some stage'. How far forward do these plans cover? 'I think it's unwise in life to look more than five years ahead.'